In his new analysis posted on http://e2.ma/webview Russell Shor, senior industry analyst, describes how credit problems are affecting the current rough diamond market.
The worsening credit and liquidity situation has severely curtailed demand for rough diamonds and caused prices to fall an average of 8% since April, he says citing the statement from Harry Winston, a partner in Canada’s Diavik mine.
Clients at the last Diamond Trading Company (DTC) sight deferred at least 50% of their allocations, possibly to next March. In June they deferred 25-50%, depending upon the estimates, especially of smaller stones, which continue to flood in from Zimbabwe in large quantities at lower prices.
Zimbabwe is not the only challenge. In the past three years, diamond manufacturers went on a buying spree as rough prices rose, with much of this activity financed by banks. In India, the credit situation became worse with the practice of “round-tripping” -- exporting large polished diamond parcels then re-importing them to inflate trading numbers and obtain higher credit lines. A government-imposed import duty of 2% on polished stones stopped that practice just as banks tightened their credit policies.
Israel’s polished diamond exports fell 19% year-on-year to $3.26 billion during the first half of 2012. Diamond controller Shmuel Mordechai said trading declined mainly because of an internal crisis that affected the local industry. Tax authorities launched an investigation in January into alleged tax evasion and money laundering taking place in the Israel Diamond Exchange. This impacted both confidence and trading levels.
For now, the DTC and other major producers are holding the line on prices -- DTC’s prices were down 1-2% on average for the June sight. Clients were expecting discounts above 5%. The DTC and other producers, however, are choosing not to sell certain qualities (particularly those polishing out in the top three colors and clarities) because demand is quite weak.
Not all rough is a difficult sell. Alrosa’s recent tender of large stones (+10.8 carats) was quite successful because these stones remain in high demand from investment buyers and wealthy consumers around the world.
A recent report by USAID about illicit diamond trade described the efforts of U.S. agencies to stop the flow of illicit diamonds. In 2009, U.S. Customs spot-checked 89 rough diamond parcel exports and 172 parcel imports and found 18 in violation of the Clean Diamonds Trade Act, which implemented the terms of the Kimberley Process. Customs seized the 18 parcels, valued at $1.15 million total. In 2010, Customs examined only five export parcels and 137 imported rough parcels, and seized14 of them for violations of the law; they were valued at $460,277.
U.S. officials, with help from the diamond industry, have identified fake KP certificates on shipments from Sierra Leone, Ghana, Guinea, Namibia and the Democratic Republic of the Congo.
The report also noted that diamond traders have been slow to adopt reporting requirements contained in the Clean Diamond Trade Act and U.S.A. PATRIOT Act. All importers and exports of diamonds are required to file a report to the State Department listing their yearly imports, exports and inventory on hand. In 2009, the first year of the requirement, only 120 firms filed. Since then, companies have complied with the reporting requirements when asked, noting they were not aware of the regulation.
Veronica Novoselova, Rough&Polished correspondent in Italy
